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SEC staff submits study on investment adviser examinations

On January 19, 2011, the SEC staff submitted to Congress its study, as required by the Dodd-Frank Act, evaluating the SEC’s need for enhanced examination and enforcement resources for its oversight of investment advisers. Based on the data presented in the study, the staff concluded that the SEC is unlikely to have sufficient capacity to conduct effective examinations of registered investment advisers under the current framework. The study presents three options to address these capacity challenges and recommends that Congress consider implementing one or more of them.

The study recommends imposing user fees on registered investment advisers to fund their examinations and notes that the SEC could be permitted to set user fees at a level designed to achieve acceptable examination frequency. User fees could provide enough resources to allow the staff to perform earlier examinations of newly-registered investment advisers and more frequent examinations on existing advisers, which the staff believes could provide a greater deterrence from wrongdoing. This option would also allow the responsibility for registered investment adviser examinations to remain solely within the purview of the SEC, which would avoid certain costs and inefficiencies expected if coordination with one or more self-regulatory organizations (“SROs”) were necessary in order to perform examinations.

Another option is for Congress to authorize one or more SROs to examine all registered investment advisers, subject to SEC oversight. SROs would be funded by membership fees, and earlier and more frequent examinations could be a benefit of this option as well. However, because the SEC would be required to oversee the operations of any SRO, it would still be required to use considerable resources. The study indicates that because of the diversity in size and complexity of registered investment advisers, authorizing multiple SROs which would each focus on a specific industry group could be advantageous.

The study also recommends that Congress consider amending the Exchange Act in order to permit FINRA to examine all of its members who are also registered investment advisers for compliance with the Advisers Act. This approach could provide for more cost-efficient oversight of dual registrants.

One SEC commissioner issued a separate statement regarding the staff study to express the view that the study’s presentation of the three options was not balanced and the recommendation to Congress was not sufficiently precise. The statement also emphasized that, in implementing the SRO recommendation, it does not have to be a single SRO and it does not need to be FINRA.

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